Published October 14, 2012
BEIJING – China is set to deliver a rare treat to the perma-bears who growl constantly that the growth model that brought three decades of double-digit economic expansion is now broken - data showing that GDP fell below target between June and September.
The first miss since the first quarter of 2009, when the global financial crisis raged, has become the consensus forecast of economists, who expect official data due on Thursday to confirm that growth slowed to 7.4 percent year-on-year in Q3.
That would undershoot the 7.5 percent rate mandated by Beijing for 2012.
There's a risk it is even worse given stuttering steel output, tepid power consumption, sagging exports and steady downward revisions to corporate profit forecasts that have investors in the Shanghai stock market set for a third straight year of losses - potentially the worst run in 20 years.
"In reality, GDP growth is probably 6 percent already," MES Advisers' Paul Markowski, a long-time consultant to China's financial authorities, told Reuters.
"China has a trade problem, a consumption issue and a leverage catastrophe waiting to happen," added Markowski, whose sub-consensus view is far from the most bearish.
The trade difficulty is clearest to see in an economy where exports generated 31 percent of GDP in 2011, according to World Bank data, and support an estimated 200 million jobs.
Data released at the weekend showed total trade in the first nine months of 2012 was up 6.2 percent on a year ago, well short of the official 10 percent target, as the debt crisis in Europe - China's biggest export market - persists.
VICIOUS DESTOCKING CYCLE
Although September exports were better than expected, officials say the trade outlook remains grim. A central bank adviser said two weeks ago that China had badly underestimated the scale of the global economic slowdown.
The uncertainty for exports has created a vicious cycle of destocking at companies, revealed in falling inventory levels according to surveys of purchasing managers.
That in turn drags on industrial output, dampens factory gate prices, squeezes margins, dents profits, makes banks wary about lending and destroys investor confidence.
Some analysts cite steel output - up a tiny 2.3 percent in the first eight months of this year compared with the same period a year ago - and electricity usage growth running at roughly half the average rate of the last five years as manifest signs of economic malaise.
Carl Weinberg, China-watching chief economist at High Frequency Economics in New York, says they are red herrings, arguing that even flat output of both are consistent with GDP growth of around 8 percent in 2012.
"If you produced enough steel last year to build 1,000 bridges, that same amount of steel can build another 1,000 bridges this year. If building 1,000 bridges boosted GDP by X percent last year, it will do almost the same this year," he wrote in a note to clients.
The question, retort the China bears, is whether they are bridges to nowhere.
SUPPLY SIDE POTENTIAL
Stephen King, global chief economist at HSBC, reckons the skeptics need more robust evidence than heavy infrastructure spending to conclude that an economic landing so hard that growth dynamics will shatter is in store for China.
"People have been prepared to write off China for the last 30 years," King said. "They've not been so good at explaining why it hasn't happened."
Opening up to foreign investors, a global revolution in technology that has lowered barriers to entry for various industries and low per capita incomes have all helped drive growth, and that supply side potential remains great, King says.
"For a whole host of reasons, China could afford to make some poor choices about capital allocation and still do incredibly well," he added.
That's little comfort though to firms and funds that have invested assuming expansion of more than 9 percent, only to see it tumble towards 7 percent in a matter of months.
The weakest forecast in the last Reuters China GDP poll a month ago was for growth of 7.1 percent for Q3, with the overall consensus for a seventh successive quarter of slowing growth to leave the economy on track for its most sluggish year of expansion since 1999.
Equity investors have arguably discounted worse than that, with a 15 percent peak-to-trough fall this year for the Shanghai Composite index .
Andrew Batson, who heads coverage of China's economy at research firm GK Dragonomics, reckons getting hung up on a specific number is to mis-read the underlying significance of the structural shift that is happening in the economy.
"There's a long-standing tradition in China, that no-one really knows the source of, that says 8 percent is the growth number below which there will be unimaginable social consequences," he said.
"I'm not sure there was ever any evidence that this theory was true. We're below 8 percent now and Chinese society is not collapsing, so I'm pretty sure it's not true."
Many economists believe China's annual growth by the end of this decade will be nearer 5 percent than the roughly 10 percent achieved since Deng Xiaoping launched market reforms in 1978. They say 6-7 percent is more likely - and more sustainable.
Beijing's five-year plan that runs to 2015 officially targets GDP growth of just 7 percent over the period.
The government says slower expansion makes it easier to rebalance the economy towards more stable domestic consumption without igniting inflation and other social perils the ruling Communist Party fear could loosen its grip on power.
Cutting the amount of investment in the economy as a share of GDP - currently above 45 percent and up 10 percentage points in a decade - is key to that rebalancing effort.
Batson's latest report reckons the shift will make aggregate demand growth more volatile and so raise the risk that growth could miss target more often - music to the ears of the bears.
"If companies were planning on 10 percent GDP growth and they are only going to get 7 percent, then they may need to invest less, or differently. That's kind of a shock to the system and people are going to have to rethink the future."
(Editing by Alex Richardson)